Fin 1.31.12 Notes

# Fin 1.31.12 Notes - Chapter 4 Fin 3244 Coupon Rate o Income...

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Chapter 4 Fin 3244 1/31/12 Coupon Rate o Income Derived from fixed income security Total Return o Capital Gains as well as dividends o If Bond 8% and market interest rate is 6% then coupon rate is worth more. Trading in the present value (PV). o Capital Gain only when you sell it. Potential gain to actual gain o Bond issued at par if coupon is accurate to market interest rate. Issue at current rate. o If interest rates low why loan out money? o Capital Gain can be on stock and bond Expected Return o Calculation to estimate based on certain conditions o Add together weighted return Treat separate entities then add together Inflation/Deflation o Deflation Lowering of prices. Going below zero. Real Estate When price is suppose to go down consumer tends to wait If everyone waits there is lower consumption Causes unemployment to go up Time Value of Money o PV and FV problems o N Number of periods o I Interest Rate o PMT amount paid (Coupon) o FV par value at maturity o CAPM Rf+(Rm-Rf)B Rm-Rf= Risk Premium Risk Premium expect to receive by being in market Risk free rate only free of default risk Because of this has a lower yield Nominal=quoted rate includes inflation Real Rate of Return= means inflation is sucked out “This isn’t real” Risk free rate includes inflation Positive cash flow based on given return o Net Present Value Present Value of various cash flows. Get PV totals then add up then subtract what you spent to make cash flows appear

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2/2/12 Holding Period o The total return from holding a stock for a specific period of time o The time you can buy and sell o Capital Gain only involves the money that you made by selling a stock Also get dividend income then potential for capital gain o Total return means any and all income during a period of time including capital gain and dividends o Realized return what you actually got Paper Return o A return has been achieved buy not yet realized by an investor during a given period of time o Potential or possible return o You haven’t sold or bought yet Mathematical process of holding period return o Bought car for 100 people rent it for 10 sell it for 150. Ex pg 153 Internal Rate of Return o Time value of money calculation o The compound annual rate of return earned by a long-term investment, the discount rate that produces a present value of the investment’s benefits that just equals its cost Simple interest o Car loan o Non compounded interest Reinvestment Rate o The rate of return earned on interest or other income received from an investment over its investment horizon.
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